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Hoping for the best

What the presidency of Donald Trump could mean for India

By Commentarao- S.L. Rao
  • Published 23.11.16

Many in the United States of America are worried about the future of the country after Donald Trump assumes charge as the president in January. In India, we should try to forecast the direction that the US will take as a world power, in terms of its economy, society and immigration.

Starting with President Ronald Reagan, the US has spent massively on defence and foreign aid. Reagan stimulated the breakup of the Soviet Union with competitive military spending. That did nothing to stop Saudi Arabia (the principal supplier of oil and gas and the major buyer of American arms) from exporting Islamic fundamentalism. It allegedly inspired and supported the terrorist attacks of 9/11. Subsequent American presidents fighting Osama bin Laden and al Qaida have unsettled stable but ruthless governments in Iraq, Libya and now Syria. They used sanctions to squeeze Iran. They engaged in a lasting war in Afghanistan. The US gave large financial and military aid to Pakistan so that there was an easy entry into Afghanistan. The American government establishment is tied to these policies.

Behind all this was a consistent belief that it was the duty of the US to bring democracy to other countries (with Saudi Arabia and Pakistan as exceptions). The Republican Party claimed to believe in less governance, but the fiscal deficit of the US shot up. The presidencies of George W. Bush and Barack Obama continued on the same tack. Democratic presidents also spent heavily on domestic social security.

We do not know if Trump has a political philosophy. But his stray remarks are sufficient to suggest the direction in which America might change. There is no mention of America's duty to export democracy and change foreign regimes. Trump has been conciliatory towards Russia and Vladimir Putin has made friendly overtures in return. For him, the Cold War is history and he does not consider it the duty of the US to protect 'vulnerable' countries in Europe, or Japan or South Korea. He is not fixated on keeping Latin American states as US vassals. He sees China as the major threat to the US, especially in economic (mainly trade) terms. How much of his ideas Trump is able to translate into different policies depends on his choice of cabinet.

For many years now, communism has not been an operating ideology even in Russia and China. These nations have both been more concerned with economic growth. It is not inconceivable that a new closeness between Russia and the US could distance the former from China. China is Russia's major financier. If the US cannot compete on this, there is little hope of distancing Russia from China.

In domestic policy, Trump is an extreme free marketeer and sees little need for major support to lower income groups for health, education and in old age. But he may not make the anticipated drastic cuts since the white beneficiaries were his core constituency. He does see the need for investment in infrastructure. At the same time, he wants to reduce taxes on business and would like American business groups to invest in Youth Service America and keep surpluses there.

President Trump will spend much less American money on military alliances. Brexit is likely to see drastic cuts in British spending on the North Atlantic Treaty Organization. European countries already spend little and may not go by Trump's desire that they pay for American protection. With Russia as a major fuel supplier to Europe and its possible closeness to the US, the Nato as an alliance against Russia might lose relevance. Economic cooperation between the US, Europe and Russia (which badly needs more modern technology in industry) will increase. We might see American investment in Russia and much more trade between the two.

At the same time, we can expect restrictions on trade with China. An American initiative to restrict the Chinese 'dumping' of goods will be a signal to many other countries like India to follow suit. This might lead to an estrangement between Russia and China. The Russian economy can profit little from China. India might lose out on Chinese investment (still a mirage). The US might be threatened by Chinese suppliers squeezing supplies to technology companies such as Apple Inc. This might well benefit India as an alternative supplier. Apple Inc. and others are already studying investment opportunities in India.

Trump wants to reduce American military spending in the Pacific on protecting Japan and Korea. So we can expect a further strengthening of the military and economic ties of these countries with India. Other Asian countries bullied by China might do the same.

There is a strong anti-Islamic sentiment in Trump. While he talks of resuming sanctions on Iran, he might actually go slow on this because he needs Iran's participation in finishing off the Islamic State. He may well distance the US from Saudi Arabia especially since the US is no longer as dependent on Saudi petro-fuels as it was earlier. India can step up its measures to halt Islamic fundamentalism in the country. Saudi investment in India is likely since India is already a major supplier of labour to Saudi Arabia and has maintained friendly relations with the country.

Pakistan may experience a decline in American military and financial largesse. The self-interested Pakistan Army may try to play both ends (US and China), by continuing with the massive ongoing Chinese investments while opening itself up to other countries. There could even be some economic cooperation with India. We must expect a reduction in Pakistan's support to terrorism, especially against India. It might suit a financially beleaguered Pakistan military establishment to begin underplaying its 'core' Kashmir issue.

The curbs on immigration to the US are focused on improving job opportunities and wages for the unskilled whites in middle America. Cheap, unskilled immigrant labour from Latin America has been the reason behind the poor job and wage situation of whites, who voted for Trump to stop this. There will be strict curbs and deportation. Trump probably recognizes the fact that the American superiority in research and technology needs support from the mass of skilled workers who are mainly from India. A squeeze on Indian immigration may not happen.

No reduction in social expenditures by Trump might match the tax reductions he has promised in his election speeches. He must also protect the constituency that voted for him, the uneducated whites. An immediate cut seems unlikely, although he might save some money by limiting the scope of Obamacare. We can expect a massive surge in infrastructure spending, which will be meant to help the same people. Given his promise of tax cuts, Trump must make unprecedented cuts in expenditures on defence and social security. He may not be able to balance the spending with the cuts. We can expect American deficits to rise, some inflation, and a fall in dollar exchange rates. With drastic cuts in Chinese imports and cuts in immigration, we might see a growth in US jobs and prices. A rise in interest rates seems likely. This will affect American investment flows.

What does all this mean for India? We must welcome Russia getting closer to the US. Opportunities for Indian investment in Russia will rise. The 'cold front' against China can only help us as we join the rest in curbing imports from China. We can expect that American manufacturers will divert the making of some of their assembly line parts to India instead of China. Interest rate hikes in the US are negative for us. We could be at the centre of a new alliance in Asia with Pacific Ocean countries. That will lead to greater economic cooperation. Our confrontations with China on the border may diminish because China would probably want to avoid the repercussions this might have on other Chinese interests elsewhere.

The Trump presidency might be good for India.

The author is former director-general, National Council of Applied Economic Research